Zillow’s Instant Offers

A case of nothing to see here, or the sound of shoes dropping?

Does Zillow already have what it would need to create an alternative selling model that does not require real estate agents at all?

After years of insisting that it was in the business of selling leads to REALTORS® and had no interest in becoming a broker, Zillow recently announced a pilot program it calls “Zillow Instant Oﬀers.” The program allows sellers on Zillow to receive oﬀers directly from a select group of investor buyers. No agent or broker is needed, though agents can pay Zillow to be part of the program by oﬀering free comparative market analyses (CMAs) to those sellers.

Zillow Instant Oﬀers is arguably a ﬂanking maneuver to Open Door, which buys homes directly from consumers using aggregated investor funds and ﬂips them back to consumers on its own website. Zillow is not yet taking a proﬁt on these sales, largely because, in the states in which it is operating the pilot program, forgoing fees allows it to claim it does not need to be a broker.

Is Zillow Instant Oﬀers a harbinger of a future in which Zillow and other disrupters capture more and more of the value of the transaction, leaving agents behind? Will Zillow replace real estate agents or become their de facto employer as Uber has become the de facto employer for many former taxi drivers?

Zillow was started in 2006 by Rich Barton. Mr. Barton had previously founded Expedia, an immensely successful travel site that brought travel agent information and self-service directly to consumers. Expedia was launched in 1999. According to the Federal Bureau of Labor Statistics, the number of full-time travel agents in the United States peaked at 124,000 in 2000 and is now around 68,000.

Zillow built its business on selling leads to agents. It has been widely criticized in the industry for having “brought a fork to the potluck.” Are there more real estate sales because of Zillow? Are there more actual buyer and seller leads because of Zillow? Or does Zillow simply slip in upstream, capture leads that agents would have received anyway, and sell them back to diﬀerent agents through its Premier Agent Program?

If the latter, that would necessarily have the eﬀect of reducing agent and broker proﬁts in the aggregate. But real estate is a business in which even a slight individual competitive edge is worth pursuing. Many individual agents and brokers see Zillow as just another way to gain competitive advantage. They are willing to pay the rising premiums for leads to increase their market share and bottom line.

The disconnect between the threat to the traditional agent-based industry model itself and the potential advantage to an individual real estate agent willing to pay the increasingly steep price for leads is the engine that has driven Zillow’s growth. In 2017 to date, Zillow’s revenues are up more than 30 percent. About three quarters of its expected one billion dollars in revenue will come from the Premier Agent Program. Zillow estimates the total value of commissions paid to real estate brokers in 2017 to be around $80 billion. This year, the number of Premier Agents paying Zillow more than $5,000 a month is up by 98 percent.

The MLS-based real estate industry in America has had a very similar structure since the 1870s, when real estate brokers gathered together in formal and informal associations to share information about listings. Is it ripe for disruption? What industry do you know that has stayed largely the same for 150 years? If you were creating a real estate industry from scratch, would you create what we have today? Would consumers love it?

If we take oﬀ our REALTOR® hats for a moment and put on our consumer hats, what do wewant when we buy (and sell) things? Recent disruptions of other businesses such as travel agents, taxi drivers, grocery, and allforms of brick-and-mortar retail suggest that we want a lack of friction and more control. That is, we don’t want to talk to a lot of people, or travel to go to stores, or spend a lot of time.

Now websites like eBay and Craigslist and Facebook allow us to sell anything from a used can opener to an airplane. Grocery shopping can be done by pointing and clicking. Books are delivered immediately to reading devices. Teslas are sold without a dealer network. Banking is mostly done online without much need for tellers or physical buildings.

What has the real estate industry done to accommodate these consumer preferences? Very little. This unimaginative response exposes existing organized real estate practice to disruption, whether we like it or not.

Forget what Zillow says it will do. What is it actually doing?

What would you do if you ran Zillow and wanted to capture more of those $80 billion? Lobby state or national regulators to ease rules and allow Zillow to act as a brokerage? Maybe. But that would be certain to encounter organized industry resistance and take time. Adopt an “Uber-like” approach connecting sellers and buyers together without acting as the broker? Even better.

What would you need?

1. An internet platform to allow sellers to feature their homes? Check

Done. Zillow already has pretty much every home in America on its system. It even claims to own the right to use all the photography that has been done to date. Sellers can already post their own listings free. And it aggregates most of the MLS data in the country. Turning on a consumer MLS would be trivially easy.

2. Advertising tools for sellers? Check

Not hard to implement. Would you like our Gold, Diamond, Platinum, or Wretched Excess package?

3. A buyer-accessible lockbox? Check

Note that for the past year or so, Zillow television ads have been showing consumers ﬁnding a house on an app without an agent, sharing it directly with friends and family without an agent, viewing it without an agent, and then enjoying their purchase. No agents appear anywhere in the process. Could Zillow buy or already own a company that could provide simple and secure consumer access using smartphones and an app to an electronic lockbox that it could rent or sell to home sellers? Sure it could. Several lockbox startups aimed at the Airbnb market would work just ﬁne.

4. An offer platform? Check

In August 2015, Zillow paid $108,000,000 for dotloop. dotloop is a web-based transaction management platform oﬀering simple digital signing and document sharing. In many states, it already has the oﬃcial real estate forms available for use on its platform. California is an exception. Could Zillow allow consumers access to these to write their own oﬀers? Maybe. It would depend on state law and copyright ownership. Could it oﬀer simpliﬁed real estate contracts of its own on its own app? Why not? Would it need to be a broker? Why? It’s only an app, after all.

5. A way to charge? Check

Here, Uber leads the way. We might think of Uber as a transportation platform. Uber insists it is just an app. Zillow could oﬀer the app free to consumers, as it does now. If deals are done using the app, there would be many ways for Zillow to charge for them.In short, there is not much to stop Zillow from using the nearly one billion dollars it will collect this year, largely from real estate agents, to create an alternative selling model that does not require real estate agents at all. At some point, its “advertising” model will hit a ceiling.

In the poem “The Walrus and the Carpenter” from Through the Looking-Glass and What Alice Found There by Lewis Carroll, the walrus and the carpenter persuade a gaggle of oysters to join them further down the beach, promising them a picnic. The oysters gleefully oblige. Then the walrus and the carpenter eat every single one.

“It seems a shame,” the Walrus said,“To play them such a trick,After we’ve brought them out so far,And made them trot so quick!”The Carpenter said nothing but“The butter’s spread too thick!”

“I weep for you,” the Walrus said:“I deeply sympathize.”With sobs and tears he sorted outThose of the largest size,Holding his pocket-handkerchiefBefore his streaming eyes.

“O Oysters,” said the Carpenter,“You’ve had a pleasant run!Shall we be trotting home again?’But answer came there none--And this was scarcely odd, becauseThey’d eaten every one.

David Silver-Westrickis a past president of the Orange County REALTORS® and has been a director of both the California Association of REALTORS® and the National Association of REALTORS®, as well as president of the Southern California Multiple Listing Service (SoCalMLS). Currently, he is a partner at San Clemente’s Keller Williams OC Coastal Realty. His email address is david@silver-westrick.com